Maruti & Hero Honda to post mostly lower profits

AGENCIESJan 23, 2008, 10.27am IST

MUMBAI: India's No. 1 car maker, Maruti Suzuki, and top motorbike maker Hero Honda Motors are forecast to report gains in quarterly net profits, but other vehicle makers are likely to have taken a hit from price discounts.

Analysts say steadier costs for raw materials, hopes of lower interest rates and new launches should now boost demand. Several vehicle makers offered discounts in the fiscal third quarter to end-December to boost sales in the festival season.

They have since raised prices and also cut production and inventory levels to reduce costs. "With stable input cost prices and cost reduction efforts yielding results, operating margins for the sector are expected to be stable," said Amit Kasat at Motilal Oswal Securities. "We expect the turnaround to commence in the fiscal fourth quarter, with volume growth in FY09 being sustained as well." India, Asia's third-largest economy, has expanded at an average of 8.6 percent over the past four years, and is poised for a similar pace in the year to March 2008.

The robust economic growth, coupled with a focus on infrastructure and stricter legislation on emissions and safety, have helped boost demand for motorbikes, cars, trucks and buses. But higher interest rates since June 2006 bumped up vehicle loan rates by 250-350 basis points, and depressed demand for motorbikes and heavy trucks in particular, as credit tightened. Nearly all commercial vehicles and more than 80 percent of cars in India are bought with loans and finance options.

A firmer rupee , which gained 12 percent against the dollar in 2007, has also crimped export earnings of vehicle makers who are expanding their global operations. The auto index gained 6 percent in the Oct-Dec quarter, lagging a 17 percent gain for the key index .

Maruti Suzuki , majority owned by Japan's Suzuki Motor Corp , is forecast to post a 19 percent gain in quarterly net profit to 4.5 billion rupees ($114 million), helped by sales of more premium cars and greater economies of scale. Annual passenger vehicle sales are forecast to nearly double to 2 million units by 2010, and a quicker shift to cars from motorbikes may help reach that target even sooner, analysts say.

Top vehicle maker Tata Motors Ltd , which recently unveiled the Nano, an ultra cheap car priced at just over $2,500, is forecast to post a 23 percent decline in profit to 3.9 billion rupees on sluggish sales of commercial vehicles. For complete poll, Sales of commercial vehicles in India had risen by more than a fifth on average in the last three years, but have taken a hit on higher interest rates, which have only spared light trucks.

Better highways and stricter emission and safety rules are expected to sustain demand for trucks long-term, although competition is growing, with the entry of more foreign firms. Bike maker Bajaj Auto is developing a $3,000 car with Renault and Nissan Motor .

Daimler has signed an agreement for commercial vehicles with Hero Group, which has a stake in top bike maker Hero Honda Motors Ltd while Sweden's Volvo has a deal with Eicher Motors . Ashok Leyland recently signed joint ventures with Nissan Motor for light trucks, engines and research.